Fed Holds the Line

As the day approached when the Federal Reserve was poised to raise or lower certain key rates, investors were likely wondering whether they would get the chance to bump up their savings.

The Fed’s Open Market Committee may have halted those plans on June 19 when it made the decision to keep the target federal funds rates between zero and 0.25%. Fed bond purchases were also set to keep its $85 billion monthly stride.

Keeping the rates where they currently stand are in line with the Fed’s decision to maintain rates at near zero throughout 2013.

With bonds offering little return, Joe and Jane Investor, particularly at credit unions, could increase their reliance on savings products, such as money market accounts and certificates of deposit.

In April, CDs were up mirroring and an upward year to date trend, according to CUNA Mutual Group’s June Credit Union Trends Report. Still, CDs were down $4.0 billion or 1.9% during the past year and $38 billion or 16% below their March 2009 peak. Annual savings growth for credit unions stood at 5.5% in April, the latest month tracked.

“During the past year, 108% of all deposit growth is attributable to liquid deposit accounts,” said Dave Colby, chief economist at CUNA Mutual. “Credit unions continue to deal with excess liquidity as the loan-to-asset ratio remains very low at 57.7%. One strategy is to lower deposit yields.”

With interest rates at low levels, members might have few options if they’re trying to grow their savings. According to a May 31 GoBankingRates.com survey of more than 10,000 six-month, one-year and two-year CD rates from financial institutions across the U.S., community banks, on average, outperformed credit unions in interest rates offered on CDs. For both credit unions and banks, the average rate ranged from a 0.30% annual yield on a six-month CD to a 0.65% APY on a two-year CD.

GoBankingRates.com said CD rates from local banks are now so close to credit union rates that there is no discernible benefit to choosing one over the other for savers who are simply looking to maximize their returns.

The Fed’s activities were designed to directly influence the eagerness of parties to buy stocks and bonds because they know that the Fed is there buying right alongside them, said Chris Martenson, founder of PeakProsperity.com, in a statement.

“With the suspected shift in this flow, investors will undoubtedly be knocked off before the markets are able to bounce back. In the meantime, individual investors, the little guys so to speak, do not have the resources to wait while Bernanke decides the momentum,” Martenson said.

Instead, they must take up a defensive investing approach where they invest in stable stocks and leave the risky stocks alone for now, Martenson said.

“With stocks being bought in record amounts as falling bond yields push even risk-averse investors toward equities, investors have to be cautious but also must continue investing during this telling point of time,” he offered.

In addition to not having many options to bolster their nest eggs, some investors are grappling with financial stress. From Jan.1 through the end of May, women age 30-44 with household incomes under $60,000 and children to support were nine times more likely to face high or overwhelming financial stress than men aged 55-64 with household incomes over $100,000 and no minor children, according to research from Financial Finesse, a financial education company based in El Segundo, Calif.

Fifty-one percent of employees reporting overwhelming financial stress have taken a loan or hardship withdrawal from their 401k plan, putting them at risk of not being able to achieve retirement security.

Liz Davidson, CEO and founder of Financial Finesse, pointed out that companies with a large percentage of their workforce in vulnerable demographics are likely facing significant costs that they may not even be aware of.

“There is no line item on a company’s income statement that totals the cost of financially stressed employees. Hundreds of studies have shown that financial stress causes serious medical conditions and higher health care costs for employers,” Davidson said.